You're correct in using the pan & crop tool.
What you need to do is grab a corner of the frame (the dotted lines with an "F" inside) and drag to make it BIGGER.
This seems counter intuitive at first, but if you think about it, the dotted frame represents the full size of your screen. By making this bigger than the image, you are effectively making the image smaller.
You will then need to use track motion (on the track header) to move the image into the correct position.